World Markets in Motion

US Industry Overview

Sunday, July 29, 2007

Despite my staunch belief that we do need to alleviate our dependence on fossil fuels, I cannot help but become irritated with the incessant din streaming from the mouths of farmers, greenies and congressmen alike. You can't escape it, so why don't we all stop trying. From television commercials, to corporate branding and our elected puppets, everyone is deputizing alternative energy and more specifically biofuels as the be all and end all to our energy dilemma.

What many fail to realize however is the sheer immensity of this task. The amount of energy we collectively produce from fossil fuels is astronomical. At this point, instead of delving into numerical data, I would like to try a metaphor. Imagine yourself in modern day Beijing. You need to get yourself, your wife and your two kids to some remote destination 30 miles away. Now try to picture the expression on an unsuspecting rickshaw driver's face as you ask him to cart you and your family that very distance, all for a cost of $3.00.

In other words, this stuff is useful, versatile and at this point, relatively cheap. With the emerging economies of China and India posting nearly double digit year over year growth, energy intensity, in particular demand for oil is expected to expand well into the 21st century. I could elaborate using widely accessible date, but I find this redundant since society is largely in agreement that energy demand is here to stay. I will instead, save the monotonous numerical crunching for later on in this editorial.

Now if we are in agreement on the aforementioned, we can agree that we need to identify viable alternative sources. I use the word viable here because it is so often omitted when discussing alternative energy. By viable, I mean a source that is renewable, easily integrated into existing infrastructures and most importantly; economically attractive when compared to its fossil fuel counter parts. This excludes you hydrogen and your cohort corn ethanol.

By this premise, only one fuel source comes to mind, and that is in fact biodiesel. Biodiesel refers to a diesel-equivalent manufactured from biological (renewable) sources which can be combusted in unmodified diesel vehicles. Wikipedia describes this chemical compound as: "Alkyl esters made from the transesterification of vegetable or animal fats."

Biodiesel is enticing for several reasons. First, it can be easily integrated and utilized into existing fueling infrastructures and vehicles. By vehicles, I am not referring to our average America commuter, but to the tens of millions of trucks, trains and boats which burn diesel on a daily basis. Unfortunately in the US, only around 3% of the vehicles on the road use diesel. While this is paltry compared to Europe's 50%, these numbers are expected to increase.

This brings me to my final point. Biodiesel is renewable. Some will attempt to argue that there is an endless supply of oil yet to be discovered, but the most fundamental principle of economics states there is endless demand for finite resources. While this doesn't mean we will run out of oil tomorrow or in ten years, it does indicate that as supply diminishes and demand increases oil will become more expensive.

Currently on the commercial scale, biodiesel is produced using virgin plant oils. While this is great in theory the numbers aren't as enticing. What would happen to these producers if the $1.00 per gallon federal tax credit were withdrawn? More importantly, what would happen if the spot price of crude oil were to drop significantly? While these two scenarios seem unlikely given the current political environment, they do poise interesting concerns regarding biodiesel's economic viability.

Where concern dwells so too does opportunity. Theoretically, biodiesel producers could cut costs using economics of scale such as Imperium Renewables and Archer Daniels Midland are attempting to do. These companies and many more like them may in fact prove successful, but there lies an even more efficient method for drastically cutting variable costs.

Last month a micro cap, by the name of Syntroleum launched a joint venture with Tyson Foods to build and co-operate a 75 million per year refinery. This venture is exciting because they intend to use fats, greases and reclaimed vegetables oils as their primary feedstock. For producers this truly is the holy grail of biodiesel. Since the feedstock is the largest variable cost, the more inexpensive the feedstock the more profitable the producer. While SYNM and TSN are targeting 2010 as their completion date, there is in fact one biodiesel producer whose been doing this continuously at a 80,000 gallon pilot plant since 2003 and commercially since October of 2006. Before I get into the specifics of this company, I believe it is prudent to walk through the basic economics.

Given that the feed stock comprises 60-75% of the finished products cost, it becomes imperative to process the lest expensive sources. The problem is, the cheaper the feedstock, the higher the fatty free acid(FFA) content and in turn the greater the difficulty to refine.

Corn oil for example, fetches around $.30-.34 per pound with a FFA of around 1%. While this feedstock is incredibly easy to process, its usage equates to a variable cost of ($.30 x 8lb = $2.40 per gallon)(8lb = 1 gallon).

With operational costs ranging from $.42-.53 and diesel rack prices nearing $3.11, there isn't much room for profit margins or excess funds to recoup the plant's initial capital cost. However, with the current federal tax credit biodiesel producers can remain competitive if they sell the biodiesel for $3.11($2.40+.45= 2.85, $3.11-2.85+1.00= $1.20 profit per gallon).

The story is even more appealing when we cut feedstock costs. Take yellow grease for example. When the FFA exceeds >20% the cost drops to under $.15. With these prices a producer could refine biodiesel for half the cost($.15 x 8lb = $1.20+.45= $1.65, $3.11-1.65+1.00= $2.46 profit per gallon). Note: these numbers exclude the Oklahoma $.25 tax credit as well as the $.50 federal BTU sludge tax credit.

One final thought on numbers. The company which I shall mention shortly will have a combined annual capacity online by Q2 2008 of 70 million gallons. Interestingly, all of the feed stocks and refined biodiesel are already locked up in contracts signed last year. This means that as of next year they will be netting close to$172,200,000. Given the 109,998,692 shares outstanding and an industry average P/E of 9.9, the company should post an EPS of $.64 and a PPS of $6.34(9.9x.64). These numbers, although estimations indicate an extreme discount when compared to current market valuations.

As I mentioned before the company, Nova Biosource Fuels, Inc.(NBF) isn't talking about doing it they are doing it. Currently, the company is in various stages of permitting and building three refineries for their own portfolio with the capacity to process 25 various feed stocks into biodiesel which meet and exceeds ASTM D 6751 standards.Why do I believe this company will succeed? Aside from the hurdles of finding funding and pioneering new technology, I look to management. Who is running the company and why? When concerning quality, NBF boosts one of the most impressive micro cap management lineups I have ever seen. Interestingly, they are all high caliber ex-oil men originating from the likes of Texaco, Halliburton Energy Services, Vanco Energy, Mobil Exploration, and Kerr-McGee Chemical.

The next question is why? Why are all of these ex-oil executives and presidents running a $300 million micro cap start-up? Basic speculation brings me to a logical answer. Big oil is in the business of making money. They have been 'banking coin' for years and they will continue to do so for many more to come. So to answer my question, the real reason these men choose NBF, is they know its technology enables them to produce biodiesel and do so economically.

Thursday, July 26, 2007

I would like to extend a warm thank you and a big thumbs-up, to the market maker and/or investor who sold me 3 shares of NBF at $2.84 today! After all what is could be more rewarding than placing an order in for 300 shares and only receiving 3? Lets see here, 3 x $2.84 = $8.52 + $7.00 for commission. Yep, that was the most cost effective $15.52 I have ever spent. Thanks!!

Tuesday, July 24, 2007

In case you didn't see this yet at Reuters, here it is. From today's developments it would appear that we are going higher. Hopefully, I will have more regarding this during the weekend.

Microvision Shares Hit Year-High After Motorola Pact

By Purwa Khandelwal

Microvision Inc. (MVIS), a developer of high-resolution displays and imaging systems, on Tuesday announced a deal with Motorola Inc. (MOT) to make tiny laser-based projectors for cellphones, sending its shares to a year-high.

Microvision said the two companies will work together initially to integrate its PicoP projector inside a functioning mobile device for demonstration purposes.

The technology is expected to enable a "big screen" viewing experience from mobile devices by projecting the content onto a wall, object or even a curved surface.

"Our goal is to have an accessory device in the market in late 2008 and an embedded device by 2009," company spokesman Jeff Wilson said by phone.

He, however, did not say whether the company would have an embedded projector or a separate accessory, which could be used with PDAs and cellphones, in its deal with Motorola.

Wilson also added that the company was in talks with other large cellphone and consumer electronic companies, but declined to provide specific details.

"This technology has a great deal of potential," Canaccord Adams analyst Jonathan Dorsheimer said by phone.

"Because the technology is enticing to the automotive market for a safety feature known as heads-up display, they (Microvision) have formed a partnership with Visteon."

He added that Microvision has also signed a deal with another tier 1 automotive parts supplier, but said the company did not disclose the name. Redmond, Washington-based Microvision's shares were up more than 12 percent at $5.45 in afternoon trade on the Nasdaq, after hitting a year-high of $6.08.

Monday, July 23, 2007

It amazes me just how quickly market sentiment can change! This morning IMAX was upgraded to a buy from hold by Merriman Curhan Ford. Analyst Eric Wold argues that, "Once Imax reported fourth quarter and first quarter results, the focus would return to the company's fundamentals -- signings, installations, and box office -- all of which have remained strong."

In response, IMAX proceeded to gap higher through the $5.00 resistance level and run as high as $5.18 in early morning trading. As this story continues to develop, those 5.5 million shorts should really begin to feel pressured to cover. Realistically, shares could run as high as $5.30-40 before overhead supply is really felt. Although, as long as there are plenty of fresh longs available to absorb this supply, IMAX could conceivably run even higher.

Sunday, July 22, 2007

In my post on Friday I neglected to mention that IMAX is heavily loaded with 5.5 million shares sold short or nearly 16% of the float. With IMAX's average volume of 300,00, it will take over 18 days for these shorts to cover.

Friday, July 20, 2007

Finally, IMAX filed its 2006 and first quarter 2007 results. The stock had been languishing despite posting record box office results due to strength from 300, Spider Man 3 and Harry Potter. With these financial uncertainties largely out of the way, IMAX appears poised to run. In early trading the stock gapped up some 9% to $4.80.

Below are some choice highlights. Heed special attention to the theater signings from the 1st and 2nd quarter of 2007. These are numbers important not only because they are some of IMAX's highest grossing revenue streams, but also because they expand IMAX's foot print i.e. the greater the number of theaters IMAX opens the greater the revenue from IMAX's digitally remastered movies. Essentially, the more theaters IMAX has the more cost effective it is for IMAX to convert Hollywood's blockbusters into the 70 mm format.

Tuesday, July 17, 2007

Monday, July 16, 2007

IMAX continues to demonstrate strong consolidation, with three candle sticks printed firmly on the 200 DMA. Today the stock showed some strength as it attempted to test its highs from last Tuesday, near the range of $4.65. While it was unable to break to new highs, the stock did close in a rather perfect cup & handle formation closing exactly on the 50 DMA at $4.55.

Many technicians will argue that the cup & handle is reserved solely for longer time frames spanning weeks or months, but even during the shorter 10 minute chart the supply and demand dynamics are identical.

For conformation we still need a high volume break through resistance at $4.60-70. This could occur tomorrow during an opening gap up, or with a long candle stick which closes above $4.60. A possible catalyst could be stellar HP results which were released late in after hours. Although, for the stock to really move the company needs to file its tardy financials.

As for MVIS all I can say is the ascending triangle formation is still in place. However, today's action makes me slightly apprehensive that we might get a failed formation. Time will tell.

Saturday, July 14, 2007

As many of you know, MVIS is one of my two largest holdings, encompassing nearly half of all portfolio assets. While this subjects me to increased risk and volatility as MVIS has a reputation of wild price movements, it also has rewarded since MVIS has printed a clear and undeniable uptrend since its lows from October 2006.

More recently MVIS created a new 52 week high at $5.90, before plummeting 22% to find support at the level of $4.60. This level of support lined up perfectly with the rising 50 DMA as well as our previous highs in April. As a uptrend progresses, it becomes increasingly important to find support at previous highs. This indicates an uptrend which, is in fact stable.

As evident in my chart, MVIS has done just that. Each sequential high has subsequently acted as support during each of MVIS's retracements. A perfect example of this was the $3.50 high made in November 2006 acting as support during MVIS's retracement from its January high of $4.08.

All this historical information is important, but what does it indicate regarding future price movement? While technical information can generate false signals, one can increase the odds of higher probabilities by systematically aligning multiple charting time frames.

Below the daily time frame, the next shorter duration would be the 60 minute spectrum. Interestingly, for MVIS this time frame prints a perfect Ascending Triangle, which is a bullish continuation pattern. The methodology behind this formation is rather simple to understand.

A stock will become range bound with firm resistance being placed at an establish ceiling. In the case of MVIS, resistance is firmly entrenching at $5.00, which also coincides with a psychological whole number barrier. Buyers continually push prices higher only to be met by selling at this level of resistance. The importance here is the series of higher lows. This indicates that, although the sellers are currently in control they are losing strength as the buyers establish support at higher and higher levels. Each sequential test of resistance increased the probability of it being broke. Thus the more tests, the greater the likelihood of a breakout. Ultimately, conformation is given when buyers push the equity through resistance with an increased level of participation(volume).

Conformation here would(will) come in the form of a higher volume break out above $5.00. If(when) this occurs, I believe MVIS can conceivably run to the level of $5.40

Friday, July 13, 2007

IMAX continues to consolidate on low volume. On the daily time frame we are resting on the previously broken 200 DMA at $4.42. On the 10 minute chart we are range bound between $4.45 and $4.50. After a strong move higher, subsequent consolidation at support is most often appreciated prior to a sequential move higher. Although it should be noted that a range bound stock can not only break out, but also break down. A break below $4.45 on higher volume would be a sell signal, where as a break over $4.50 on higher volume would be a buy signal.

Tuesday, July 10, 2007

IMAX Corp. is a technology company which specializes in larger than life films based on its 70mm film format. The company has been growing rapidly as it continues to ink theater deals. The reason for this is partly because of the company's increasingly attractive technology in this age of inexpensive high definition television and surround sound. Simply put, one can not recreate the IMAX experience in their home. It's just not possible to find a 88 foot high definition TV.

From a economic perspective IMAX theaters are a gold mine. We see this clearly if we compare the per screen numerical average of a standard theater vs. an IMAX theater. Spider Man 3, for example estimated $35,540 and $57,000 for a standard and an IMAX theater respectively. It's no wonder why some analysts estimate that China's IMAX screen count is supposed to triple to 26 before 2011.

The question is why have shares languished some 50% from their September 2006 highs? While I hate to cast blame, I feel obligated to in this situation. I could understand one CEO waffling the job of running a multi-national, but two? Is that even possible? How can two CEOs, both receiving hansom six figure salaries run a company so poorly? This is where I become confused, but I will leave it at that. Through a series of mismanagement, delinquent filings and mountains of back dated theater installments; shareholders find themselves irritated and broke. While I don't own any shares personally and only purchased call options today, I can't help but feel as irate as the shareholder who bought last May. It's almost as though management is trying to sink their own ship(Weren't they trying to sell the co. last year?). If anything the technology is the only thing keeping this drift wood afloat, for companies such as Sony and Time Warner continue to choose IMAX as the preferred method for releasing their blockbusters.

Once again we find ourselves on the cusp of yet another slam dunk flick as Harry Potter and the Order of the Phoenix is due for release today. IMAX shares responded accordingly today as they powered through their 200 DMA on x2 average daily volume. Despite the nearly 9% move today, shares could still run farther if the company actually files their fiscal 2006 and 2007 10-K in a timely fashion. However, with managements track record er lack thereof, maybe we shouldn't be so naive...again.

Monday, July 9, 2007

I sold my ADM July $35.00 call options at $1.20 for a 180% gain. I also bought some Harvest Natural Resources Inc.(HNR) July $12.50 call options for $.65. This is an independent oil and gas exploration company with reserves primary located in Venezuela. You can read about the fundamentals here.

Saturday, July 7, 2007

Over the last 20 years, author Stephen Leeb has created quite the reputation for himself, as an innovating predecessor of changing economic paradigms. His previous books include a 1986 (Getting in on the Ground Floor) novel foretelling the great technology bull market of the 1990s as well as a staunch warning of the impending technology collapse in his 1999 book, Defying the Market.

In his 2004 book, The Oil Factor, Leeb returned to the limelight with an unprecedented prediction of soring energy prices. Three years later we now appreciate the full maturation of his predictions. While these projections were not all that startling, the true gravity of the situation is. At the time, a simple analysis of demand side economics would have revealed the pressures on energy prices as wealthy Americans adopted the use of sports utility vehicles and the emerging economies of China, India and Russia required a greater energy intensity. Given the low prices at the time, simple deduction would conclude an increase in energy prices.

While the issues of rising energy prices seems rudimentary from the vantage point of a neophyte, the ramifications are not so basic. The book does an astounding job of factually revealing current supply and demand dynamics, while demonstrating the future consequences for investors.

Of the various chapters in the book, chapter 2 "Our Amazing Oil Indicator," remains one of the most intriguing and useful. Since all economies demand energy for economic output, Leeb and his associates devised a method for comparing and contrasting rising oil prices with S&P performance. First, they evaluated oil prices from 1973 to 2003. Finally, they notated S&P 500 index performance during the same time frame. In Leeb's words, "The results were staggering. When oil rose by 100 percent or more over a twelve-month period, stocks during the next eighteen months experienced an average maximum monthly decline of 27 percent." The basic premise here is, as oil moves higher the market moves lower.

The question is, with oil prices up significantly, how come the market is reaching new highs? I have my speculations such as strength in the energy, and natural resource sector as well as the resilience of the American consumer. While more though needs to be put into this, one word does come to mind, unsustainable.

In conclusion, The Oil Factor is a must read for every investor wanting to protect their investments in the emerging world of scarce and expensive energy.

Secondly, I closed out my DVR July $17.50 call options for a 16% gain. I really wanted to hold these contracts longer, but I was forced to close due to the nonexistent liquidity of these contracts. Due to this, the contracts oscillated wildly over the last month often times neglecting to reflect the accurate time value of the contracts.

Basically there was a point when the contract was worth $.10 despite DVR trading at $17.60 with over a month before expiration. I love trading options, but with out proper liquidity they will often times trade sporadically not accurately reflecting the true value of the contract i.e. intrinsic value + time value.

Seemingly, both of these stocks are breaking out over previous highs, with DVR moving to a new 52-week high and ADM breaking out of its previous 3 week trading range. Most likely, this is an extension of the current oil rally coupled with DVR's undervalued fundamentals. Some caution should be noted as ADM is moving towards its 200 DMA as well as resistance in the $34.90 range.

Thursday, July 5, 2007

I sold the remainder of my July $12.50 PEIX call options at $2.05 for a 215% gain today. I also bought more July $35.00 ADM call options for $.40 and $.45. ADM looks poised for yet another move higher. Apparently someone wanted those July $35.00 ADM call options today as 13,995 contracts exchanged hands. Stay tuned.

Of the potential players within the industry, none is more dominate than Archer Daniels Midland. However, Shares have been hammered some 9% during the last three months due to deteriorating margins related to excessive ethanol supply. While PEIX, AVR and others muscled out of their down trends on June 24 after the announcement of possible favorable legislation, ADM continued to slide. This apparently changed on Monday after a Bank of America analyst upgraded ADM to a buy from neutral, citing ADM's "...range of assets capable of storing and transporting its products to far-flung places," as a means to capitalize on the swelling market for grains and seeds.

Technicals too are in an apparent reversal, as ADM gapped through its upper descending trendline on July 2nd. Despite this favorable adjustment, the 200 DMA still looms overhead at $34.97; which could provide resistance if ADM is unable to generate sufficient volume to push through this level of overhead supply.

Sunday, July 1, 2007

The associated press released a great article today regarding Texas's plans for water desalination facilities. While I do not have the time or energy tonight to write up a full analysis regarding the significance of these events, I did pull up the chart of my favorite desalination pure play, Consolidated Water Co. Ltd.(CWCO). Technically, the company appears on the verge of a multi year breakout. Hopefully, I will have more on this topic later.